The Decline and Fall of the First Global Economy: How Nationalism, Protectionism, and Collectivism Spawned a Century of Dictatorship and War

Lindsey, Brink, Reason

THE BUZZWORD IS OF RELATIVELY recent vintage, but the reality it describes is nothing new. Globalization, by any other name, was in full swing a century ago. Indeed, it was remarkably advanced, even by contemporary standards.

In 1913, merchandise trade as a percentage of gross output was about 12 percent for the industrialized countries. They did not match that level of export performance again until the 1970S. The volume of international capital flows relative to total output reached heights in the early 20th century that have not been approached since. In that earlier time, capital flows out of Great Britain rose as high as 9 percent of gross domestic product; by contrast, the seemingly staggering current account surpluses of Japan and Germany in the 1980s never surpassed 5 percent of GDP. It is fair to say that much of the growth of the international economy since World War II has simply recapitulated the achievements of the era prior to World War I.

The first world economy was made possible by the staggering technological breakthroughs of the Industrial Revolution. Most obviously, new forms of transportation toppled the age-old tyranny of distance. For inland transport, the significance of the railroad is difficult to overestimate. In 1830, a journey from New York to Chicago took three weeks; just one generation later, in 1857, that same trip took only two days. The second half of the 19th century witnessed an explosion of railroad construction around the world. Great Britain's railway mileage more than tripled, from 6,621 miles in 1850 to 23,387 miles in 1910; over the same period, mileage in Germany grew nearly tenfold, from 3,637 miles to 36,152 miles; the United States, astonishingly, experienced a nearly thirtyfold increase, from 9,021 miles in 1850 to 249,902 miles in 1910. The railroads knitted countries into truly integrated national markets and facilitated the penetration of foreign goods from port cities into the interior.

Meanwhile, another technology was uniting those national markets into a global whole. Although the steamship was first developed early in the 19th century, further innovations in subsequent decades--the screw propeller, steel hulls, the compound engine--transformed what had been primarily a river vessel into cheap and reliable ocean transport. The effect on freight costs was nothing short of spectacular: An index of freight rates along Atlantic export routes fell by 70 percent in real terms between 1840 and 1910.

The Industrial Revolution's burst of technological creativity thus demolished the natural barriers to trade posed by geography. At the same time, it created entirely new possibilities for beneficial international exchange. In the core of the new global economy, the factories of the North Atlantic industrializing countries pumped out an ever-widening stream of manufactured goods desired around the world. Those factories, in turn, relied on access to cheap natural resources and raw materials. And in the less advanced periphery of Asia, Africa, and Latin America, new technologies allowed those natural resources and raw materials to be grown or extracted more cheaply than ever before.

So arose the initial grand bargain on which the first global division of labor was based: The core specialized in manufacturing, while the periphery specialized in primary products. For Great Britain, the first industrial power, manufactured goods constituted roughly three-quarters of its exports. The sprawling United States, on the other hand, straddled both core and periphery. The urbanized East took industrialization to a new level and carried America past Great Britain in economic development. The West, meanwhile, followed the path of other temperate "regions of European settlement" (Canada, Australia, New Zealand, and Argentina) and specialized in the production of grains, meats, leather, wool, and other high-value agricultural products. Finally, the South roughly followed the tropical pattern of development, focusing on such products as rubber, coffee, cotton, sugar, vegetable oil, and other low-value goods. …

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